Chairman’s Annual Shareholder Meeting Address

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ADDRESSES TO THE TOWER LIMITED ANNUAL SHAREHOLDER
MEETING
30 MARCH 2017

Chairman’s address

Good morning ladies and gentlemen.

My name is Michael Stiassny. I am Chairman of Tower Limited.
As it’s 10.00am, I am pleased to declare open the 2017 Annual Meeting
of shareholders.

On behalf of my fellow Directors, welcome to our shareholders and
guests here at the Ellerslie Event Centre as well as those who have
joined us via webcast. This is your meeting and we appreciate you
making the effort to be here.

Today’s agenda is on the screen behind me. In a departure from our
usual Annual Meeting format, I will begin today’s meeting by providing
you with an update regarding the two takeover proposals we have
received.

Our Chief Executive Officer, Richard Harding will take you through last
year’s operating performance and the progress that has been made in
the business in more recent months.

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Following Richard’s presentation, we will move to the formal resolutions
set out in the Notice of Meeting.

Shareholders are welcome to ask general questions following the
presentations and to ask specific questions on the resolutions to be
considered as each is put forward.

I remind any media present that, while you are welcome, this is a
meeting for shareholders. Richard and I will be happy to talk to you after
the meeting.

Before we start the presentations, there are a few housekeeping matters
to cover off.
 If you have a cell phone, please switch it off.
 If we need to evacuate this room for any reason, there are exits
through the doors to my right and also the entrance you came
through.
 In the event of an emergency, please listen to the instructions from
the Ellerslie staff.
 Bathroom facilities are located out the door you came through
heading back towards the lifts.
 If you are feeling unwell, please advise one of our Tower staff who
will assist you.

Finally, we hope that you will join us for refreshments next door, to the
left, at the conclusion of the meeting.

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With me today are your directors, Steve Smith, David Hancock, Graham
Stuart, Warren Lee, and Chief Executive Officer, Richard Harding. Also
in attendance today, seated in the front row, is the Tower Executive
Leadership Team and our Auditors.

Let’s now move on to the formal part of the meeting.

Formalities

Quorum
The Company’s constitution specifies a quorum of 25 shareholders. As
you can see, and as confirmed by Computershare, this requirement has
been met.

Proxies
In addition to those attending in person today, 932 shareholders, holding
a total of 100,458,418 shares, have appointed proxies (including proxies
instructed to abstain). The appointed proxies are represented by 11
proxy holders.

In my capacity as Chairman of the meeting and in my own name I hold
proxies for 859 shareholders, representing 65,905,400 shares.

I intend to vote all undirected proxies I have received in favour of
resolutions 1, 2 and 3.

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Annual Report and Notice of Meeting
The annual report was made available on Tower’s website on 23
December 2016. Spare hard copies of the annual report are available in
the registration area.

I propose that we take the Annual Report and Notice of Meeting as read.

Your Board has long held the view that the market has been struggling
to fairly and accurately value Tower. The share price decrease,
attributable to the legacy of the Canterbury earthquakes and the issues
created by EQC overcap assessments, has been particularly vexing.

When announcing the FY2016 annual results, the Board noted it had
made two decisions to enable Tower to accelerate performance
improvement and in so doing, maximise value for shareholders.

The first decision was to move ahead with plans for a new core
insurance IT platform. And the second was to work towards creating a
separate company dedicated to Canterbury claims’ resolutions.

Under separation, two entities – New Tower and RunOff Co – would
have been created, each with a very clear and distinct mandate and
strategy. New Tower would have been unencumbered, and able to
realise its true potential, while RunOff Co would have managed the
legacy liabilities relating to Canterbury.

The Board also made the decision to suspend the full year dividend as
this capital was required to support structural separation. This was a

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short term measure, with the dividend expected to resume once
separation is complete.

Since we announced the separation proposal, two offers to acquire 100
per cent of Tower shares have been received.

On the 9
th
of February, Tower announced it had entered into a binding
Scheme Implementation Agreement with Fairfax Financial Holdings.
This agreement would see Fairfax acquire 100% of Tower shares at
$1.17 per share. Supported by two of Tower’s major shareholders, Salt
Funds Management and ACC who collectively hold 18.1% of Tower
shares, this proposal was unanimously approved by the Board, in the
absence of a superior offer.

Tower then received a non-binding indicative proposal from Suncorp
Group– via its wholly-owned subsidiary, Vero Insurance New Zealand–
to acquire all Tower shares at an indicative cash price of $1.30 per
share. Subsequently, Vero acquired additional shares in Tower at $1.40
per share, increasing its holding to 19.99%.

Both Fairfax’s binding scheme at $1.17, a 48% premium to the then
share price of $0.79, and the subsequent non-binding indicative
proposal from Suncorp validate the board’s view that the market has
significantly undervalued Tower, as well as the value of the opportunity
the Tower business represents to other industry players

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While assessing these proposals, the Board’s singular consideration is
to deliver a recommendation based on maximising value for you, our
shareholders.

Given the likelihood of a protracted process, the Board may look to raise
capital to ensure a prudent level of capitalisation and solvency to protect
the ongoing business from contingencies during this period.

We will continue to update you on developments as they occur and we
hope to be in a position to provide further details in the near future. In
the meantime, shareholders do not yet need to take any action in
response to either of these offers.

I will be happy to answer questions you may have about the proposals
at the end of the results presentation to the extent that available
information, confidentiality and commercial sensitivity permits.

I cannot stress enough that irrespective of the current uncertainty
regarding Tower’s future ownership, the management team’s focus is
expressly on driving the business forward, delivering to the strategy and
maintaining the positive momentum that has started to build.

Our core New Zealand business remains in good shape and our Pacific
business has huge potential which is yet to be fully exploited.

Importantly, there was a marked improvement in three core metrics in
the second half:

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 We saw a return to policy growth in the core New Zealand book;
 We delivered a reduction in management expenses; and
 We reduced claims costs.

And, while we acknowledge there is some way to go, these positive
trends are continuing in the current financial year.

This progress is testament to the efforts of the Tower team who strive
every day to build this business and assist our customers. They are a
great team and on behalf of my fellow directors, I thank them for their
efforts.

Thank you also to our customers, business partners and you – our
shareholders – for your continued support of Tower.

I will now hand over to Richard to go over the 2016 performance and to
update you on Tower’s more recent progress.


Chief Executive Officer’s address

Good morning everyone.

2016 saw Tower undertake a significant amount of work to support our
ambition to become a high performing general insurer.

After defining our strategy in 2015, our new leadership team has been
guiding our business and our people to achieve the first phase of our
strategy.

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These positive results have been delivered against a backdrop of
increasing costs across the industry and the continued uncertainty of
Canterbury.

At last year’s meeting, I talked about three priorities that we needed to
focus on:
• Delivering a high performance service culture
• Operational excellence, and
• Accurate pricing of risk.

I am pleased to say that focusing on these aspects of the business over
the course of the 2016 Financial Year delivered tangible results and
benefits.

Firstly, in terms of delivering a high-performance customer service
culture:
• A focus on retention lifted retention rates by over 2.6
percentage points and allowed us to return to positive policy
growth in the core New Zealand book for the first time since
2013.
• We advanced this with the launch of online quote to buy
functionality for our core Tower branded products and the
development of an end to end customer experience. I will talk
more about our online capability shortly

Operational excellence is all about ensuring we have the right cost base
that will enable us to improve margins and increase our competitiveness
in the market.

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We made inroads addressing operational excellence in Financial Year
16 on the back of initiatives that continue today:
• Operating at a 42% management expense ratio is not
sustainable in a competitive market. A focus on expenses and
targeting non personnel costs resulted in a $5 million reduction
in underlying management expenses in Financial Year 16.
• We made a decision that our IT systems were a key constraint
on our business and without addressing this issue we would not
be able to achieve the significant shift in costs that we are
seeking to make. As a result, we impaired the current IT assets
with a view to replacing them in the short term. We are
exploring moving to the EIS platform.
• Our other key focus is our claims expenses. One of the first
things I did when I joined Tower was elevate claims to the
Executive level given its importance. The team then established
initiatives to address escalating claims costs. Pleasingly, claims
costs bucked the trend and reduced in the second half and we
have seen that continue in the last six months

Accurate pricing of risk is at the core of what an insurance company
does and is a real passion of mine. An insurance company assesses
risk and puts a price in the market to remove that risk for our customers.
The journey towards underwriting excellence began in 2016, and that
work continues today.
• We’ve repriced our portfolios, some of which had not been
repriced in a number of years

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• We launched new simple and easy products that we believe will
differentiate us in the market
• We updated legacy product wordings to reduce exposure to
moral hazards and fraud

Culture and capability initiatives were also added into the mix during the
year. In order to be a high performing general insurer we are growing a
culture that encourages our people to challenge the status quo and
ensures they have the capability to deliver on our strategy. In order to
effect change we need strong leadership.
Over the course of the year we introduced insurance capability to our
executive team and launched leadership programmes to develop our
people.

It was a full-on 12 months for the team at Tower and the momentum
continues. We still have a lot to do to refocus Tower on its core.

Turning to the financial results.

Tower reported a loss of $21.5 million in Financial Year 16.

This reflects a $25.3 million impact from additional provisions for
Canterbury and a $14.1 million impact from intangible asset impairment.

The intangible asset impairment arose as a result of the realisation that
our current IT environment is not fit for purpose and will not enable us to
achieve our long term strategic goals.

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The underlying profit was $20.1 million, compared to $30.3 million in
Financial Year 15. This drop was driven primarily by increased claims
costs and lower investment income.

Gross Written Premium was slightly down year on year. Pacific Gross
Written Premium fell $1.2 million due to a tightening position on risk in
Papua New Guinea and the Solomons. New Zealand Gross Written
Premium fell by $1.2 million with the continued run off of the ANZ
portfolio offset by growth in the core Tower book.


The legacy from the Canterbury earthquakes remains a difficult and
complex situation.

The ongoing claims development situation is being faced by all insurers.
Unfortunately, as the only listed pure New Zealand General Insurer, it is
most visible with us. We are the canary in the coal mine.

Six years on, insurers still do not have clarity on the number and value of
claims that remain. Re-provisioning for Canterbury has become the
norm for all as evidenced by Southern Response, MAS and IAG
announcements in 2016. More recently, in the first quarter of 2017, Vero
also increased their EQ provisions.

This slide makes the situation abundantly clear.

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The chart on the left shows that gross claims costs increased by $78
million over the year to reach $870 million. This resulted in a net impact
on Tower of $35.1 million pre-tax, or $25.3 million post tax.

The continued cost escalation was primarily driven by the EQC and
litigation claims.

This is further emphasised by the chart on the right where you see
Tower received 297 completely new claims in the 2016 year. The team
did a great job in closing 534 claims, though they continue to swim
against the tide with the continual arrival of new overcap claims from
EQC.

These issues with the EQC continue to confront the entire industry and
add to the complexity of an already challenging situation. Tower is part
of the insurance industry task force that is working with government and
the EQC to review data, identify how many overcap or new claims are
coming down the line and ultimately, seek to resolve these issues.

The business continues to perform in line with expectations as we
approach the half way point of Financial Year 17 and I am pleased that
the momentum we started to build in 2016 has continued into the new
financial year.

Gross Written Premium has grown slightly year on year as a result of our
digital, TradeMe and Air New Zealand Airpoints programmes.

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The claims initiatives that I talked about earlier continue to gain traction
and we are seeing continued reduction in our underlying BAU claims
expenses.

Our focus on management expenses has continued and we expect to
deliver lower management expenses in the half year.

We have successfully launched and delivered a number of important
operational projects since the full year;
 Our new simple and easy products were launched in October
offering an innovative package style product to the New Zealand
market.
 In late November we launched a revamped TradeMe platform to
address performance and stability issues. We have seen
significant growth in this channel as a result.
 We launched the digital quote to buy functionality for house and
contents in December so we now have our full suite of products
online. Sales performance is exceeding expectations.
 In November, we signed a partnership with Air New Zealand
Airpoints. This was an important win for us and shows the
confidence that market-leading brands have in our business and
the transformation we are embarking on. The Airpoints partnership
provides Tower with an attractive consumer demographic that fits
nicely with our other partnerships.
 We’ve been amazed at the positive response we’ve had, with over
15,000 customers registering in the first month.

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I have already talked about the Canterbury Earthquakes. It remains a
complex and difficult situation for all insurers, claims costs continue to
develop as a result of additional overcap claims from EQC and growth in
the level of litigation and customer disputes. Our appointed actuary,
Deloitte, is due to provide an updated actuarial report for our half year
results.

It has been a very active period for us in terms of weather and seismic
activity.
 On November 14 a magnitude 7.8 earthquake occurred in the
Kaikoura region. This had a devastating impact on the local
community and our thoughts remain with them through the
recovery.
 To help get these communities back on their feet faster, insurers
signed an MOU with the EQC to manage under-cap claims on
EQC’s behalf. This means we can help our customers immediately
and can manage the claims process end to end, from day one.
 To date, we’ve received around 2,700 under-cap claims that we
will be managing on behalf of the EQC.
 We have received a further 270 Tower claims that we believe will
end up being over-cap.
 Of the 3,000 total claims received, 590 have already been settled
and closed.
 It is important to note that Kaikoura is very different to the
Canterbury situation

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o The policy structure has changed, we now have sum insured
policies which caps the liability for insurers.
o And signing the MOU with the EQC ensures we retain full
visibility of our liabilities.

 These changes make it highly unlikely that we will see a repeat of
the outcomes experienced in Christchurch that have resulted in 6
years of escalating costs. We remain confident that the maximum
claims cost will be $7.2 million after tax
 We have also seen the Port Hills Fires and the recent “Tasman
Tempest” storm which struck Auckland and the upper North Island
a few weeks ago.
 We expect the Port Hills Fires to cost around $1.2 - 2m and the
Auckland storms to cost around $3.5 – 4.5m
 Combined, these two events are expected to fill our aggregate
reinsurance excesses, resulting in a pre-tax impact of $5m
 Reaching our storm aggregate means we are well protected
against further events for the remainder of the year

Insurance exists to help customers and communities recover from
events like these. Insurance allows our customers and the community to
be confident that they won’t be left out of pocket if something happens to
them, or what they hold dear.

The work we are doing sets us up well for the future and will continue to
give our customers the confidence that when things do go wrong, they
can rely on us to set them right.

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Shareholders can also be confident that the benefits delivered through
our approach that focuses on driving improvements to turn Tower into a
high performing insurer will create significant value for them.

Before I hand over to Michael, I want to thank my executive team and
the entire team at Tower for the effort they have put in over the past 18
months and the continuous improvement we have seen as a result.


Ends

Annual Shareholder MeetingFull Year Results to 30 September 2016Tower Limited
30 March 2017

Meeting agenda
2
•
Chairman’s address
•
CEO’s address and performance overview
•
Questions
•
Board resolutions
•
General business

Michael StiassnyChairman
Chairman’s address

Current offers for Tower sharesThree options currently being considered, further update to be provided once increased certainty
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STRUCTURAL SEPARATION
FAIRFAX SCHEME
SUNCORP OFFER
•
Separation of Tower into 2 entities

“New Tower” and “RunOff Co”
•
Will require up to $100m of incremental capital into the group
•
Default option if Suncorp or Fairfax offers do not complete
•
Scheme Implementation agreement signed 9 February
•
Fairfax to acquire 100% of Tower shares for $1.17 per share
•
Work ongoing to prepare documentation for shareholders
•
Conditional offer of $1.30 per share received on 22 February
•
Currently hold 19.9% of shares
•
Tower board working through offer to understand conditionality

CEO’s address & performance overviewRichard HardingChief Executive Officer

Refocusing on the coreFocusing on our strategic imperatives has delivered a number of early wins
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High
performance
customer
service culture
Operational
excellence
Accurate
pricing
of risk
Culture and Capability

Improvement in retention rates

Return to positive policy growth

Launch of online capability

Launch of partnership with Airpoints

Launch of customer experience

Reduction in expenses

Decision to address IT systems

Reversed trend on claims costs

Repricing of portfolio

Launch of new products

Product and pricing changes

Appointment of new exec team

New leadership programmes

Launch of new values

Financial performanceReported loss of $21.5m for the full year driven by IT impairments and further Canterbury provisions
GROUP PROFIT SUMMARY
(NZ$m)
•
Reported loss reflects :

$25.3m impact from movement in Canterbury provisions ($35.1m pre-tax)

$14.1m impact from intangible asset impairment ($19.6m pre-tax)
•
Provisions increased at year end -$7.0m post tax impact related to risk margin increases post 8 September announcement
•
Underlying profit returned to long term trends in H2

H2 underlying profit of $12.6m vs H1 underlying profit of $7.6m
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Notes:1.
FY15 underlying profit restated from $28.2m to $30.3m du
e to the classification of foreign tax credits as one off items
2.
Tower has lost the ability to use foreign tax credits due to
the New Zealand business being in
a loss making position followi
ng Canterbury provision increases and IT impairments
3.
Reflects underlying profit
rather than reported profit
$ million
FY 16
FY15
Movement $
Movement %
Gross written premium
303.2 305.6 (2.3)
(0.8%)
Underwriting profit
19.8
26.3
(6.5)
(24.7%)
Underlying profit after tax
20.1 30.3
1
(10.2)
(33.6%)
Canterbury impact
(25.3)
(36.2)
Impairment of intangibles
(14.1)
-
Profit on discontinued businesses
-1.4
Foreign tax credits written off
2
(2.2)
(2.1)
Reported loss
(21.5)
(6.6)
Underlying EPS
(c)
3
11.9
17.8
DPS (c)
8.5
16.0
Key ratiosClaims ratio
50.3%
47.7%
Expense ratio
41.9%
41.9%
Combined ratio
92.2%
89.6%

Continued uncertaintyCanterbury earthquake costs continue to escalate as a result of new overcap claims and increasing litigation
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Trading updateThe business is performing in line with expectation for the first few months of the FY17 year
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OPERATIONAL ACHIEVEMENTS
CATASTROPHE UPDATE

Key initiatives now live

Airpoints launched in January

Full suite of products now digital

Business performing in line with expectations

Slight GWP growth

Claims initiatives gaining traction

Continued success in reducing management expenses
•
Canterbury EQ situation remains complex
•
Resolution of Kaikoura claims remains on track
•
Aggregate reinsurance excess now filled – well protected for further events in FY17

Questions

Board resolutions

Board resolutions
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•
Resolution 1

Appointment and remuneration of the Auditor
•
Resolution 2

Re-elect Michael Stiassny as a director
•
Resolution 3

Re-elect Graham Stuart as a director

General business

Annual Shareholder MeetingFull Year Results to 30 September 2016Tower Limited
30 March 2017